Smart Ways to Pay for a College Education
Finding the Best Fit for the Future
by Steven Audino
With the rise in college costs easily outpacing inflation every year, even affluent families benefit from developing a smart college-financing strategy. Fortunately, careful planning and strategic use of certain savings vehicles can help you fund your child’s education without draining your portfolio — or saddling your child with debt.
What It Costs to Attend College Today
According to the College Board, tuition, fees, and room and board averaged $15,213 for in-state students at four-year public institutions in 2009. Those same expenses soared to $35,636 for students at private nonprofit colleges and universities. Assuming a 6 percent rate of inflation, a child matriculating in eight years will face an average tab of nearly a quarter million dollars for a four-year private-school education. And since college costs have risen faster than overall inflation for most of the last 30 years, even a 6 percent yearly increase in educational expenses may not be enough.
College Savings 101
To avoid surprises when that first tuition bill arrives, consider these smart planning tools:
- A 529 plan lets families save for college by investing in tax-free, state-sponsored funds. “A 529 plan can be a terrific way to save,” says Cindy Bailey, Senior Policy Analyst of Education Finance for the College Board. “They are especially popular with grandparents who like to enroll the child as soon as they are born.” Not all 529 plans offer the same investment options and benefits — such as tax-deductible contributions — so ask your financial advisor to find the plan that works best for your family. You can invest in 529 programs offered in any state, but if the money isn’t used for college, the earnings are subject to federal income tax, and a 10 percent penalty is imposed.
- Prepaid tuition plans, offered by some colleges and universities, let you pay for future education costs at today’s prices. If your child is several years away from starting college, and you’re reasonably sure that he or she will want to attend a participating school offering prepaid plans, this is a shrewd move. For example, a $25,000-per-year tuition purchased four years ahead of time could save you $36,000, assuming that the 6 percent yearly increase holds steady. “But it’s important to understand the fine print,” says Dave DeBlois, director of the College Planning Center of Rhode Island. “You need to know what happens to the money if the student chooses not to enroll” at any of the participating schools.
- Start early, invest wisely. There’s no better way to pay for college than to begin saving ASAP. Saving $250 a month over 20 years could add up to $60,000. How you structure your portfolio is also critically important. To keep pace with the 6 percent annual inflation of college costs, be sure to consult your financial advisor about whether your portfolio is structured to maximize your return, taking into account your time frame and tolerance for risk.
- Stafford loans. Even if you can cover your son’s or daughter’s college costs, applying for a federal loan can make sense. “There are also philosophical issues,” says DeBlois. “Some parents want their children to have a sense of ownership over their education.” Research suggests that kids have a greater appreciation for things that they pay for themselves. Plus, parents can pay off all or some of the loan when it comes due after graduation.
The right investment plan is ultimately determined by the institution your child attends. It is pretty much impossible to determine exactly how much you will need, but one thing is for sure: To lessen the impact of sticker shock, it is important to start planning, and saving, sooner rather than later. A financial advisor can help you create a strategy that will help to prepare you for whatever lies ahead — be it Ivy League or State.